Graphic: Where is rent increasing and decreasing the most?
The multifamily sector has been on a tear lately when it comes to new construction. Developers are capitalizing on the strong demand and steady rent growth to bring even more projects to the market. Despite concerns that some metros are reaching a saturation point, there is a robust pipeline of projects teed up for 2016.
The U.S. multifamily housing sector is expected to add some 480,000 new units this year, according to the 2016 Dodge Construction Outlook. That volume is up 11.6% compared to the 405,000 units that were forecast to be completed in 2015.
Anecdotally, it is easy to point to markets around the country from Detroit to Denver that are experiencing a building boom. But, there also are some clear standouts by sheer volume – notably New York City, Dallas and Los Angeles. Each of those metros issued new permits in 2015 that will allow builders to add more than 20,000 new multifamily units. The hands down leader is the New York City-Jersey City MSA, which issued permits for 64,053 new multifamily units through the first 11 months of 2015, according to the U.S. Census Bureau. The data includes projects with 5 or more units.
Although apartment construction is on the rise nationally, the top 10 states in the country account for the lion’s share of all activity with about two-thirds of the national multifamily construction. The top five states include Texas, New York, California, Florida and Washington, according to the U.S. Census Bureau. The student housing sector also is seeing a similar rise in projects that are in close proximity to colleges and universities. For example, ABODO recorded a 58% spike in the student housing properties that it tracks in the New York state market from April to November 2015.
Two questions facing the rental industry are – how much longer that building boom will continue, and will eager developers deliver more supply than the market can absorb? Generally, the answers to those questions varies on a case-by-case basis and requires drilling down into the unique dynamics of each market or submarket. However, there are some signs emerging that developers may need to pull back on the reins in some metros. The new supply may be getting slightly ahead of demand as evidenced by vacancies that edged slightly higher in fourth quarter to 4.4%, according to Reis Inc. Student housing rents in some high growth metros, such as Minneapolis and Denver, also dipped slightly lower in January, according to ABODO. That decline could likely be attributed to a short-term impact from the lease-up that is occurring among the newly completed projects in those markets.
Multifamily developers have been riding on the coattails of some strong demographic trends, notably more renters by choice, as well as growth in population and household formations. Following the housing crash, homeownership remains at some of the lowest levels in more than 25 years at about 63.5%. However, the housing market is showing signs of life as it relates to sales and new construction. For example, single family construction is expected to increase by 17% this year with 805,000 new homes expected to be built, according to Dodge.
The pendulum may be swinging back in favor of home ownership as rental rates rise higher, borrower credit improves and millennials start thinking about marriage and families. Added to that, many of the projects being built cater to high-end and luxury renters in order to capture rents necessary to support today’s higher high building costs. That segment of the renter pool is not without limits, particularly for millennials that are carrying a hefty load of student loan debt. So, even though developers still have some big plans on the drawing board, the construction pipeline may start to thin heading into 2017 and 2018.